Economics Preparation


Suppose the government increases the tax on tobacco products, and suppose the demand for these products is inelastic. How should this be analyzed on the multiplier model? Which of the following statements is true?

A. The planned expenditure line will shift upwards, because people will pay more in the shops on tobacco products.

B. The planned expenditure line will shift downwards, because people will buy fewer cigarettes, so their spending on tobacco after allowing for the tax will be lower.

C. The withdrawals line will end up shifting downwards, because the rise in the tax will cause people to save less.

D. The injections line will shift downwards, because this includes all government spending net of taxes.


Suppose year 1 is taken as a base period. Nominal GDP that year is £500 billion. By a later year 2, nominal GDP has reached £700 billion but the GDP deflator is 125. What will real GDP be each year?

A. £625 billion in year 1 and £560 billion in year 2.

B. £625 billion in year 1 and £700 billion in year 2.

C. £500 billion in year 1 and £560 billion in year 2.

D. £500 billion in year 1 and £700 billion in year 2.


Which of the following statements about the LM curve is false?

A. An increase in the demand for money will shift LM right.

B. An increase in the supply of money curve will shift LM right.

C. It shows that the higher is the level of output, the higher is the equilibrium rate of interest.

D. The more interest elastic is the demand for money, the more interest elastic is the LM curve.


A profit-maximizing monopolist finds that if it remains open, the best output is 50 a week, but at this output it would make a loss. Under what circumstances should it shut down?

A. If AR at this output is below SAC.

B. If AR at this output is below AVC.

C. If MR at this output is below SAC.

D. If MR at this output is below AVC.


What do you understand by 'Laissez faire' ?

A. Active Intervention

B. Sound commercial affairs

C. Interference by the state in law and order

D. None of these


Which of the following predictions is not made by the supply and demand model?

A. If there is excess demand, the price will rise.

B. If there is excess supply, the price will fall.

C. If there is no excess demand or excess supply, the market will be in equilibrium.

D. A market which is out of equilibrium will always move rapidly to the equilibrium.


Which of the following statements about duopolists in the Cournot model of oligopoly is false?

A. Each firm makes an assumption about how much the other will produce, and sets its own output at the level which will maximize its profit if the other firm behaves as assumed.

B. Each firm has a reaction curve showing its chosen output for different outputs that the other might set.

C. The equilibrium is where the reaction curves intersect.

D. If the duopolists produce homogeneous products, then the equilibrium price will be the same as if the industry had a monopoly.


Suppose at various times, the regulator of a natural monopoly switches its rules as shown in the following four statements. Which switch might not result in the firm making a lower loss or more profit?

A. A switch from a marginal cost pricing rule to a two-part tariff.

B. A switch from an average cost pricing rule to rate of return regulation.

C. A switch from rate of return regulation to revenue cap regulation.

D. A switch from revenue cap regulation to price cap regulation.


Suppose a country is currently producing at a point on its production possibility frontier, and undertakes no trade with other countries. Then trade is opened up. Which of the following would not occur as a direct result?

A. Its production possibility frontier would shift.

B. Its production would shift to another point on its production possibility frontier.

C. The pattern of products that the country produced would differ from the pattern that its consumers consumed.

D. Consumers would be able to consume at a point outside the production possibility frontier.


A profit-maximizing perfect competitor is in short-run equilibrium with an output of 100 per day. Which of the following events would not cause it to alter its output in the short-run?

A. A change in the demand for the product it makes.

B. A change in the number of other firms in its industry.

C. A change in the price of a fixed input.

D. A change in the price of a variable input.